Don't let it get away!

There has been a lot of concern about the state of the offshore drilling market recently. However, as of yet, it would appear that Rowan Companies (NYSE: RDC) is yet to feel the chill sweeping across the industry.

Heading for tough times According to industry leaders, Transocean (NYSE: RIG) and Seadrill (NYSE: SDRL) , as well as a host of Wall Street analysts, the offshore oil and gas drilling market is just starting what is thought to be a multi-year slowdown. Transocean was the first to highlight this slowdown at the end of last year, when the company's management came out and told reporters that there was a "cold wind" blowing over the sector. These comments from Transocean were followed by comments from analysts at Citigroup, UBS, Barclays, and Raymond James,all of which slashed sector earnings forecasts by 20% for the next fewyears. Analysts also made the claim that day rates for ultra-deepwater, or UDW, drilling units will drop by around 16%, to an average of $475,000 per day over the next few years, as part of the wider slowdown.

This view has been supported by recent comments from Seadrill's management, reporting that that the day rates for UDW assets actually declined between the third and fourth quarters of last year. Additionally, Seadrill believes that during the next few years, as oil companies try to reign in capital spending, demand for drilling units will slow further-- this will affect the majority of the industry.

So overall, it would seem as if the offshore drilling industry is set for a tough few years -- but one company appears to be avoiding the decline.

Bucking the trend Rowan Companies is one of the smaller offshore drillers around, although size has not stopped the company trying to beat the big boys at their own game.

Indeed, Rowan has just reported an impressive set of fourth quarter numbers. In particular, Rowan revealed that during the three months ending December, the company's rig utilization had increased to 88%, and the average day rate commanded per drilling unit had jumped around 10% year-on-year.

That being said, Rowan did report a slight decline in the average day rate commanded by its drilling units between the third and fourth quarters of last year, in line with the industry trend. Still, Rowan's average day rate is expected to jump over the next year as the company brings its new high-spec UDW drillships online. During the fourth quarter of last year, Rowan's average day rate was in the region of $160,000, but day rates for the company's new drill ships start at around $600,000. All in all, for full-year 2013 Rowan reported an average day rate received of just under $171,000, compared to $156,300 during 2012.

Having said all of that, it would appear that Rowan has 17 jack-up units coming off contract over the balance of 2014 -- not a good sign when the market in general is softening. Nevertheless, Rowan's management remains confident that they will find follow-on work for these units, at or above their current day rates, although I remain skeptical. Actually, according to Terry Bonno, Transocean's senior vice president for rig marketing, "in this cyclical business, customers often strategically wait for over-supplied markets before pressing ahead with drilling, in order to secure long-term contracts at lower rates." This is a view that is supported by Robin Shoemaker, analyst at Citigroup who believes that while drilling contractors previously had the upper hand in negotiations with their customers, the balance of power has shifted recently so that customers are now in control -- as a result, rates for drilling units are set to fall broadly. So if Rowan can renegotiate contracts at similar rates to those achieved this year, I would be surprised.

But it could be worse. During the space of the next year, 31 of Diamond Offshore's 57 drilling units are coming off contract -- that's 54% of the company's fleet.

New boats The first of Rowan's new UDW drillships arrived in the first few months of this year. All in all, four of these units will be delivered and three are already contracted out for a day rate in excess of $600,000. The first drillship to be delivered is currently in transit to West Africa to begin testing before commencing a three-year contract with Repsol in April; this should boost Rowan's bottom line from the second quarter. The three remaining drillships will be delivered throughout the year. As a quick comparison, Diamond reported at the end of the fourth quarter that the average dayrate of its UDW drillships was $350,000 per day, nearly half that of Rowan's new contracts.

This brings another problem into play, the issue of age. In particular, since the Gulf of Mexico disaster, oil companies have demanded only the highest-specification drilling units to minimize risks and increase safety; these units can also drill deeper and faster. As Rowan's fleet of UDW drillships is only just leaving the shipyard, the company has the youngest fleet in the industry. The average age of Seadrill's drillship fleet is around five years. Unfortunately, Diamond's average floater unit age is slightly under 30 years and Transocean's average age is over 20 years. Both Diamond and Transocean do have a number of new drilling ships slated to be delivered during the next few years, but both these companies are on the back foot when renegotiating contracts.

All in all, with a fleet of new UDW drillships Rowan looks well placed to ride out the offshore drilling industry slowdown beginning to take place.

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